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2008

Formative versus reflective measurement models: Two applications of

formative measurement
T. Coltman
University of Wollongong, tcoltman@uow.edu.au

T. M. Devinney
University of New South Wales

D. F. Midgley
INSEAD, Fance, david.midgley@insead.edu

S. Venaik
University of Queensland, S.Venaik@business.uq.edu.au

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Recommended Citation
Coltman, T.; Devinney, T. M.; Midgley, D. F.; and Venaik, S.: Formative versus reflective measurement
models: Two applications of formative measurement 2008.
https://ro.uow.edu.au/infopapers/689

Research Online is the open access institutional repository for the University of Wollongong. For further information
contact the UOW Library: research-pubs@uow.edu.au
Formative versus reflective measurement models: Two applications of formative
measurement

Abstract
This paper presents a framework that helps researchers to design and validate both formative and
reflective measurement models. The framework draws from the existing literature and includes both
theoretical and empirical considerations. Two important examples, one from international business and
one from marketing, illustrate the use of the framework. Both examples concern constructs that are
fundamental to theory-building in these disciplines, and constructs that most scholars measure
reflectively. In contrast, applying the framework suggests that a formative measurement model may be
more appropriate. These results reinforce the need for all researchers to justify, both theoretically and
empirically, their choice of measurement model. Use of an incorrect measurement model undermines the
content validity of constructs, misrepresents the structural relationships between them, and ultimately
lowers the usefulness of management theories for business researchers and practitioners. The main
contribution of this paper is to question the unthinking assumption of reflective measurement seen in
much of the business literature.

Keywords
formative, reflective, international business, integration-responsiveness, marketing, market orientation,
studies, measurement, models, validity

Disciplines
International Business | Marketing | Physical Sciences and Mathematics

Publication Details
This article was originally published as Coltman, T, Devinney, TM, Midgley, DF & Veniak, S, Formative
versus reflective measurement models: Two applications of formative measurement, Journal of Business
Research, 61(12), 2008, 1250-1262. Original journal article available here

This journal article is available at Research Online: https://ro.uow.edu.au/infopapers/689

 Formative versus Reflective Measurement Models:

Two Applications of Formative Measurement

Tim Coltman, University of Wollongong

Timothy M. Devinney, The University of New South Wales

David F. Midgley, INSEAD

Sunil Venaik, The University of Queensland

December 2007

The views here are solely those of the authors, who appear in alphabetical order. The authors

thank the anonymous reviewers and the editor of the special issue for their many helpful

comments. Send correspondence to Tim Coltman, Centre for Business Services Science,

University of Wollongong, Wollongong, Australia 2522 (tcoltman@uow.edu.au). Timothy M.

Devinney, Australian School of Business, The University of New South Wales, Sydney,

Australia 2052 (T.Devinney@agsm.edu.au). David F. Midgley, Marketing Area, INSEAD,

Boulevard de Constance, 77305 Fontainebleau, France (david.midgley@insead.edu). Sunil

Venaik, UQ Business School, The University of Queensland, Brisbane, Australia 4072

(svenaik@business.uq.edu.au).
 Abstract

This paper presents an organizing framework that assists researchers in the design and

validation of formative and reflective measurement models. The framework draws from the

extant literature, includes both theoretical and empirical considerations, and is illustrated through

two important examples, one from international business and one from marketing. Both

examples concern constructs that are fundamental to theory-building in these disciplines, and

constructs that most scholars measure reflectively. In contrast, application of the framework to

these examples suggests that a formative measurement model may be more appropriate. These

results reinforce the need for all researchers to justify, both theoretically and empirically, their

choice of measurement model for their constructs. Utilization of an incorrect measurement

model undermines the content validity of the constructs, misrepresents the structural

relationships within which these constructs are embedded, and ultimately lowers the usefulness

of management theories for business researchers and practitioners. The main contribution of this

paper is to question the unthinking assumption of reflective measurement seen in much of the

business literature.

Keywords: Formative, reflective, international business, integration-responsiveness, marketing,

market orientation
 1

Formative versus Reflective Measurement Models:

Two Examples of Formative Measurement

1. Introduction

Management scholars often identify structural relationships among latent, unobserved

constructs by statistically relating covariation between the latent constructs and the observed

variables or indicators of the latent constructs (Borsboom, Mellenbergh, and Heerden, 2003,

2004). This allows scholars to argue that if variation in an indicator X is associated with

variation in a latent construct Y, then exogenous interventions that change Y can be detected in

the indicator X. Most scholars assume this relationship between construct and indicator is

reflective. In other words, the change in X reflects the change in the latent construct Y. With

reflective (or effect) measurement models, causality flows from the latent construct to the

indicator.

However, not all latent constructs are entities that are measurable with a battery of

positively correlated items (Bollen and Lennox, 1991; Edwards and Bagozzi, 2000; Fornell,

1982). A less common, but equally plausible approach is to combine a number of indicators to

form a construct without any assumptions as to the patterns of inter-correlation between these

items. A formative or causal index results (Blalock, 1964; Diamantopoulos and Winklhofer,

2001; Edwards and Bagozzi, 2000) where causality flows in the opposite direction, from the

indicator to the construct. Although the reflective view dominates the psychological and

management sciences, the formative view is common in economics and sociology.

The distinction between formative and reflective measures is important because proper

specification of a measurement model is necessary to assign meaningful relationships in the

 2

structural model (Anderson and Gerbing, 1988). Theoretical work in construct validity (Blalock,

1982; DeVillis, 1991; Edwards and Bagozzi, 2000) and structural equation modeling

(Baumgartner and Homberg, 1996; Chin and Todd, 1995; Shook, Ketchen, Hult, and Kacmar,

2004) enhances our understanding, however, considerable debate still exists regarding the

procedures a working researcher should follow to achieve construct validity (e.g.,

Diamantopoulos, 2005; Finn and Kayande, 2005; Rossiter, 2005). This paper is not to repeat or

continue this debate. Rather, the authors take the middle ground, building on the work of both

those who stress theoretical justifications for constructs and those who argue for empirical

validation as part of measure development.

This paper presents an organizing framework for construct measurement that begins with

theoretical justification to define the nature of the focal constructs, and then employs a series of

empirical tests to support the causal direction between constructs and their measures. The

framework builds on the work of Jarvis, Mackenzie, and Podsakoff (2003) who provide a set of

decision rules for deciding whether the measurement model should be formative or reflective.

However, the framework here differs from Jarvis et al.’s decision rules in several respects, most

importantly in the procedures proposed and the attention to measurement error.

The major contribution of this paper is to question the common assumption of a reflective

measurement model seen in much of the empirical business literature. The validity of this

assumption is measured by applying the proposed framework to two widely used constructs in

the business literature, integration responsiveness (from the discipline of international business)

and market orientation (from the discipline of marketing). These two empirical examples are

chosen: (1) because of the predominance of the reflective modeling approach for these constructs,

even though a formative model can be theoretically more appropriate, and (2) due to the
 3

criticality of the underlying phenomena to the development of the disciplines of international

business and marketing.

In the case of the integration responsiveness framework, the diverse measures of each of

the integration and responsiveness pressures are unlikely to be highly intercorrelated as a

reflective structure requires. A priori, a formative approach to measurement would seem worthy

of consideration, yet most of the work in this area takes the reflective stance to measurement,

often without any consideration of alternatives (Venaik, Midgley, and Devinney, 2004).

Similarly, most research on market orientation defines it as a one-dimensional construct

measured through a multi-item reflective scale. Yet, the main scales that measure market

orientation—MARKOR (Kohli and Jaworski, 1990) and MORTN (Deshpande and Farley,

1998)—are conceptualized as a set of activities that make up the attribute (see Narver and Slater,

1990, p. 21), implying a formative model. Furthermore, the substantive inconsistencies in the

market orientation literature (Langerak, 2003) raise many questions about the dimensionality

(Siguaw and Diamantopoulos, 1995) and measurement (Narver, Slater, and MacLachlan, 2004)

of the market orientation construct. These examples serve to illustrate a problem in the

international business and marketing literature, where insufficient attention is paid to the

measurement of constructs.

The paper is organized as follows. The next section presents the organizing framework

for designing and validating reflective and formative models using both theoretical and empirical

considerations. Then our framework is applied to the two illustrative and important examples

taken, respectively, from international business and marketing. The purpose here is to examine

whether reflective or formative measurement models are more or less appropriate, not to debate

the content validity of the measures that various scholars adopt.

 4

2. An organizing framework for designing and validating reflective and formative models

In recent years, scholars have begun to challenge the blind adherence to Churchill’s

(1979) procedure with its strict emphasis on exploratory factor analysis (Spearman, 1904),

internal consistency (Cronbach, 1951) and the domain sampling model (Nunnally and Bernstein,

1994). In psychology, Borsboom et al. (2003, 2004) use basic logic and measurement theory to

argue that the choice of model is dependent upon the ontology invoked by the latent construct. In

marketing, Rossiter (2002) provides a general procedure for scale development which extends

“accepted” practice by reemphasizing the importance of theoretical considerations. Borsboom

and Rossiter both argue that scholars should focus only on theoretical considerations and resist

the temptation to conduct empirical tests.

Alternatively, Diamantopoulos (2005) and Finn and Kayande (2005) argue that both

theoretical and empirical criteria are necessary to design and validate measurement models.

Empirical analyses provide an important foundation for content validity, especially to detect

errors and misspecifications or wrongly conceived theories. For example, finding a negative

relationship when theory and common sense suggest a positive relationship would be a concern

for researchers.

This paper follows the stance of Diamantopoulos, and Finn and Kayande but takes a

different perspective on empirical measurement and the role that measures play in the choice of a

formative or reflective measurement model. To comprehensively capture the necessary

theoretical and empirical aspects, the paper presents an organizing framework for designing and

validating formative and reflective models (see Table 1). As shown in the table, three theoretical

considerations and three empirical considerations distinguish formative models from reflective

ones. The following sections briefly discuss each of these considerations.


Table 1: A Framework For Assessing Reflective and Formative Models: Theoretical and Empirical Considerations
Considerations Reflective model
Theoretical Considerations
1. Nature of Latent construct is existing
construct

Latent construct exists independent of the
measures used
2. Direction of Causality from construct to items
causality between
items and latent
Variation in the construct causes variation in
construct the item measures

Variation in item measures does not cause
variation in the construct
3. Characteristics of Items are manifested by the construct
items used to

Items share a common theme
measure the
construct

Items are interchangeable

Adding or dropping an item does not change
the conceptual domain of the construct
Empirical Considerations
4. Item Items should have high positive
intercorrelation intercorrelations

Empirical test: internal consistency and
reliability assessed via Cronbach alpha,
average variance extracted, and factor
loadings (e.g., from common or
confirmatory factor analysis)
5. Item relationships Items have similar sign and significance of
with construct relationships with the
antecedents and antecedents/consequences as the construct
consequences
Empirical test: content validity is
established based on theoretical
considerations, and assessed empirically via
convergent and discriminant validity
6. Measurement Error term in items can be identified
error and
Empirical test: common factor analysis can
collinearity be used to identify and extract out
measurement error
5
Formative model Relevant literature
Latent construct is formed Borsboom et al. (2003, 2004)

Latent constructs is determined as a combination of its indicators
Causality from items to construct Bollen and Lennox (1991);

Variation in the construct does not cause variation in the item Edwards and Bagozzi (2000); Rossiter
measures (2002); Jarvis et al. (2003)

Variation in item measures causes variation in the construct
Items define the construct Rossiter (2002) ; Jarvis et al. (2003)

Items need not share a common theme

Items are not interchangeable

Adding or dropping an item may change the conceptual domain of
the construct
Items can have any pattern of intercorrelation but should possess the Cronbach (1951); Nunnally and
same directional relationship Bernstein (1994); Churchill (1979);

Empirical test: indicator reliability cannot be assessed empirically; Diamantopoulos and Siguaw (2006)
various preliminary analyses are useful to check directionality
between items and construct
Items may not have similar significance of relationships with the Bollen and Lennox (1991);
antecedents/consequences as the construct Diamantopoulos and Winklhofer (2001);

Empirical test: nomological validity can be assessed empirically Diamantopoulos and Siguaw (2006)
using a MIMIC model, and/or structural linkage with another
criterion variable
Error term cannot be identified if the formative measurement model is Bollen and Ting (2000); Diamantopoulos
estimated in isolation (2006)

Empirical test: vanishing tetrad test can be used to determine if the
formative items behave as predicted

Collinearity should be ruled out by standard diagnostics such as the
condition index
 6

2.1 Theoretical considerations

Three broad theoretical considerations are important in deciding whether the measurement

model is formative or reflective. These considerations include: (1) the nature of the construct, (2) the

direction of causality between the indicators and the latent construct, and (3) the characteristics of the

indicators used to measure the construct [numbering relates to the rows in Table 1].

Consideration 1: The nature of the construct. In a reflective model, the latent construct

exists (in an absolute sense) independent of the measures (Borsboom et al., 2004; Rossiter, 2002).

Typical examples of reflective scenarios include measures of attitudes and personality that are

measured by eliciting responses to indicators. Practically all scales in business and related

methodological texts on scale development (Bearden and Netmeyer, 1999; Bruner II, James, and

Hensel, 2001; Netmeyer, Bearden, and Sharma, 2003; Spector, 1992) use a reflective approach to

measurement. For example, examination of papers in the Journal of International Business Studies and

the Journal of Marketing in 2006 reveals that nearly 95 percent of the constructs measured with

multiple items use a reflective structure without consideration of an alternative formulation.

In contrast, in a formative model, the latent construct is dependent upon a constructivist,

operationalist or instrumentalist interpretation by the scholar (Borsboom et al., 2003). For example, the

human development index (HDI) does not exist as an independent entity. Rather, it is a composite

measure of human development that includes: health, education and income (UNDP, 2006). Any

change in one or more of these components is likely to cause a change in a country’s HDI score. In

contrast to the reflective model, few examples of formative models are seen in the business literature.

Consideration 2: Direction of causality. The second key theoretical consideration in deciding

whether the measurement model is reflective or formative is the direction of causality between the

construct and the indicators. As shown in Figure 1, reflective models assume that causality flows from

the construct to the indicators. In the case of formative models, the reverse is the case, causality flows
 7

from the indicators to the construct. Hence, in reflective models, a change in the construct causes a

change in the indicators. In the case of formative models, it is the other way around; a change in the

indicators results in a change in the construct under study. Thus, the two models in Figure 1 are

different, both psychometrically and conceptually (Bollen and Lennox, 1991). The difference in causal

direction has profound implications both for measurement error (Diamantopoulos, 2006) and model

estimation; topics discussed in section 2.2.

Figure 1: Reflective and Formative Measures

Effect Model (Reflective indicators) Causal Model (Formative indicators)

ξ ξ ζ

X1 X2 X3 X4 X1 X2 X3 X4

δ 1 δ 2 δ3 δ 4

X1 = λ1ξ + δ1 ξ = γ1X1 + γ2X2 + γ3X3 + γ4X4 + ζ

X2 = λ2ξ + δ2
X3 = λ3ξ + δ3
X4 = λ4ξ + δ4

Consideration 3: Characteristics of indicators. Significant differences are present in the

characteristics of the indicators that measure the latent constructs under reflective and formative

scenarios. In a reflective model, change in the latent variable must precede variation in the indicator(s).

Thus, the indicators all share a common theme and are interchangeable. This indicator
 8

interchangeability, enables researchers to measure the construct by sampling a few relevant indicators

underlying the domain of the construct (Churchill, 1979; Nunnally and Bernstein, 1994). Inclusion or

exclusion of one or more indicators from the domain does not materially alter the content validity of

the construct.

However, the situation is different in the case of formative models. Since the indicators define

the construct, the domain of the construct is sensitive to the number and types of indicators

representing the construct. Hence, adding or removing an indicator can change the conceptual domain

of the construct. However, as Rossiter (2002) points out, this does not mean that we need a census of

indicators as Bollen and Lennox (1991) suggest. As long as the indicators conceptually represent the

domain of interest, they may be considered adequate from the standpoint of empirical prediction.

2.2 Empirical considerations

Paralleling the three theoretical considerations above, are three empirical considerations that

inform understanding of the measurement model: (4) indicator intercorrelation, (5) indicator

relationships with construct antecedents and consequences, and (6) measurement error and collinearity

[numbering relates to the rows in Table 1].

Consideration 4: Indicator intercorrelation. In a reflective model, the indicators are evoked

by the underlying construct and have positive and, desirably, high intercorrelations. In a formative

model, the indicators do not necessarily share the same theme and hence have no preconceived pattern

of intercorrelation. Indicators in a formative model can theoretically possess no intercorrelation or high

or low intercorrelation.

Regardless, researchers should check that indicator intercorrelations are as they expect. Such

checks are a necessary part of the various preliminary analyses for questionnaire items administered to

samples of respondents. These preliminary analyses include checking for the presence of outliers (e.g.,

using distances in factor spaces for reflective measurement models or regression influence diagnostics
 9

for formative models); checking that the dimensionality of the construct is consistent with a

researcher’s hypothesis (e.g., using common factor models or principal components analysis);

establishing that the correlations between items and constructs have the expected directionality and

strength (e.g., through bivariate correlations, factor or regression analysis); reliability statistics (in the

case of the reflective measurement model); and, where several constructs are part of a theoretical

structure, showing that common method bias is not an issue (e.g., by the absence of one common

factor). Some of these preliminary analyses (and the diagnostics that go with them) shed useful light

on issues of indicator intercorrelation and inferentially suggest whether one measurement model or

another might be preferred. However, in themselves, they cannot either support or disconfirm

theoretical expectations as to the nature of the measurement model. For that, researchers require

stronger tests.

Since reflective indicators have positive intercorrelations, measures such as factor loading and

communality, Cronbach alpha, average variance extracted and internal consistency are used to

empirically assess the individual and composite reliabilities of the indicators (Trochim, 2007).

However, as these measures of reliability assume internal consistency—that is, high intercorrelations

among the indicators in question—they are inappropriate for formative indicators, where no theoretical

assumption is made about inter-item correlation. One of the key operational issues in the use of

formative indicators is that no simple, easy and universally accepted criteria exists for assessing the

reliability of formative indicators.

Consideration 5: Indicator relationships with construct antecedents and consequences. In

the case of reflective models, the indicators have a similar (positive/negative, significant/non-

significant) relationship with the antecedents and consequences of the construct. The requirement for

interrelated indicators is not the case for formative indicators as they do not necessarily share a

common theme and, therefore, do not have the same types of linkages with the antecedents and
 10

consequences of the construct. This requirement is a significant issue when using formative models,

particularly as it has implications about the appropriate level of aggregation of formative indicators.

While aggregating indicators to create a construct achieves the objective of model parsimony, it may

come at a significant cost in terms of the loss of the rich, diverse and unique information embedded in

the individual indicators underlying the theoretical model. Edwards (2001) makes a similar point for

second and higher order dimensions.

In the case of formative measurement, Diamantopoulos and Winklhofer (2001) suggest three

possible approaches. First, one relates the indicators to some simple overall index variable, such as a

summary or overall rating—this approach is taken for the second example (market orientation).

Second, one applies a Multiple Indicators and Multiple Causes (MIMIC) model, where both formative

and reflective indicators measure the construct. Third, one applies a structural model linking the

formatively measured construct with another construct that is theoretically related and measured with

reflective items. This approach establishes criterion and nomological validity, and is the approach

taken in the first example (i.e., integration-responsiveness pressures).

Consideration 6: Measurement error and collinearity. A key difference between formative

and reflective models is the treatment of measurement error. As shown in Figure 1, an important

assumption underlying the reflective measurement model is that all error terms (δi of Figure 1) are

associated with the observed scores (xi) and, therefore, represent measurement error in the latent

variable. Such a correlational structure is not assumed in the case of a formative model. The

disturbance term (ζ) is not associated with the individual indicator or the set of indicators as a whole,

and therefore does not represent measurement error (Diamantopoulos, 2006).

In the case of reflective models, researchers can identify and eliminate measurement error for

each indicator using common factor analysis because the factor score contains only that part of the

indicator that is shared with other indicators, and excludes the error in the items used to compute the
 11

scale score (Spearman, 1904). However, in the case of formative models, the only way to overcome

measurement error is to design it out of the study before collecting the data. Diamantopoulos (2006)

suggests two possible ways to eliminate the error term: (1) capture all possible causes on the construct,

and (2) specify the focal construct in such a way as to capture the full set of indicators. Both

approaches legitimately exclude the error term (ζ=0). In the light of the above, it is clear that unlike

the reflective model, no simple way exists to empirically assess the impact of measurement error in a

formative model.

However, Bollen and Ting (2000) suggest that the tetrad test can provide some assistance for

the assessment of measurement error in formative models. A “tetrad” refers to the difference between

the products of two pairs of error covariances. Derived from Spearman and Holzinger (1924), the test

is based on nested vanishing tetrads that are implied by comparing two theoretical measurement

models. In the case of a reflective model, the null hypothesis is that the set of non-overlapping tetrads

vanishes. In simpler terms, when the intercorrelations between pairs of errors are compared, they

should tend to zero. Referring back to Figure 1, the assumption underlying the reflective model is that

the correlations between the δi are zero. The tetrad test confirms whether or not this is true.

The tetrad test is a confirmatory procedure that should not be used as a stand-alone criterion for

distinguishing formative from reflective models. Specifically, if the hypothesis that the errors are

uncorrelated is rejected, it can be for one of two alternative reasons. One is that the construct is better

measured formatively, not reflectively. The other is that reflective measurement is more appropriate

but the error structure is contaminated. One possible source of contamination is common method error.

Similarly, if the hypothesis that the errors are uncorrelated is accepted, this could still be a mistake. A

possibility, although unlikely in practice, is that a formative model is correct but that the indicator error

structures are uncorrelated. Thus, while serving as an important pointer, the results from the tetrad test

do not provide definitive proof as to the correct measurement model.

 12

Another measurement issue that researchers need to check in formative models is collinearity.

The presence of highly correlated indicators will make estimation of their weights in the formative

model difficult and result in imprecise values for these weights. Given a criterion variable, as above,

an estimate of the impact of collinearity can be made by regressing the indicators on this variable and

computing standard diagnostics such as the condition index.

In the next section, the three sets of theoretical criteria and three sets of empirical criteria, are

applied to two key constructs in international business and marketing, integration-responsiveness and

marketing orientation.

3. Application one: measuring international business pressures

The Integration Responsiveness (IR) framework of Prahalad and Doz (1987) is widely used in

the international business literature to characterize the environmental pressures confronting firms as

they expand worldwide. According to this framework, firms come under countervailing pressures to

simultaneously coordinate the activities and strategies of their local business units to attain global

competitive advantage (global integration) while adapting these activities and strategies to the unique

circumstances of the countries in which they operate (local responsiveness).

Although this framework has been applied for over a decade, the issue of relevance here is

whether the formative or reflective measurement model is appropriate for these pressures. Venaik et

al.’s (2004) review of the literature demonstrates that nearly all researchers have taken the reflective

route and only a handful the formative. More critically, their study shows that little published debate,

justification or validation can be found to justify the route that each researcher took. Hence, it is

important to apply the theoretical and empirical considerations enunciated in Table 1.

3.1. Theoretical considerations

Consideration 1: nature of the construct. The environmental pressures facing a multinational

enterprise cover a domain of enormous breadth and diversity. Researchers in international business
 13

have characterized these pressures as global integration pressures—global competition, the need to

reduce costs, and the pressures of technological change, etc.—and local responsiveness pressures—

diversity of market infrastructure, country based regulation, local customer heterogeneity, etc. It is

difficult to think of these pressures as being innate characteristics of the business environment that

actually cause overall global integration or local responsiveness pressures.

Consideration 2: direction of causality. A more logical approach is to view the diverse facets

of the environment as forming IR pressures rather than the other way around. Indeed, the very word

“pressures” implies this view (from the Latin pressura—the action of pressing, Webster’s Dictionary).

Thus, the direction of causality is from the various aspects of the international business environment to

what the researcher defines as the pressures through the measures chosen, rather than “latent” pressures

being reflected in correlated measures. Therefore, a formative model is likely to be a more appropriate

structure for testing the IR framework.

Consideration 3: characteristics of indicators. Additionally, it is not clear that the individual

items in this domain—be they questionnaire items or variables from economic databases—share a

common theme in the way required by the reflective approach. For example, any number of integration

pressures may underlie the firm’s need to integrate its activities worldwide—these could include “the

importance of multinational customers”, “investment intensity”, etc. (Prahalad and Doz, 1987; pp. 18–

19). There is little reason to believe that all these pressures are sampled from a common domain and

are interchangeable, as is required when applying a reflective approach. Why, for example, would an

item designed to measure the “importance of multinational customers” necessarily be related with one

designed to measure “investment intensity.” Similarly, country infrastructure is a different aspect of

local responsiveness pressures than say, subsidiary country regulations, even though both force firms to

design their strategies on a country-by-county basis. Indeed, the diversity of phenomena that needs to
 14

be considered under the heading of IR pressures suggests at least a prima facie case for the formative

viewpoint.

Based on the three theoretical considerations in the proposed framework—the nature of the

construct, the direction of causality, and the characteristics of the items used to represent the

construct—the IR framework is best conceptualized and measured using a formative model. Next, we

apply a number of empirical tests to corroborate the suitability of this model.

3.2. Empirical considerations

Based on a comprehensive survey of the IR literature, Venaik et al. (2004) administered 23

indicators of IR pressures to a sample of 163 managers from the subsidiaries of multinational firms in

35 countries. These data form the basis for the empirical tests discussed below.

Consideration 4: indicator intercorrelation. As discussed above, Venaik et al. conducted a

range of preliminary analyses on these data (including outlier detection, bivariate correlation analysis,

principal component analysis and common factor analysis). The major conclusion from these analyses

relevant to this paper is that more than two integration-responsiveness pressures are needed to

adequately represent the domain of the 23 indicators. At least for these data, five pressures are needed

to represent what much of the literature has forced into two. Table 2 shows the association between the

23 items and these five pressures of government influence, quality of local infrastructure, global

competition, technological change and resource sharing, as shown by preliminary analyses. The five

pressures are largely independent of one another, as demonstrated by low intercorrelations in oblique

rotations. Given these five pressures, the directionality and strength of the indicators also fit

expectations. However, diagnostics for the common factor model were poor, raising concerns as to

whether the reflective model was appropriate. Overall, these initial analyses support the theoretical

considerations above by tentatively suggesting five formatively measured pressures rather than two

reflectively measured ones.

 15

Table 2: IR Pressures. Dimensionality and Association between Constructs and Indicators Suggested
by Preliminary Analyses
Constructs

logical change
Government

competition
local infra-
Quality of
influence

Resource
structure

Techno-

sharing
Global
No. Indicators
1 Product decisions influenced by government √
2 Price decisions influenced by government √
3 Advertising decisions influenced by government √
4 Promotion decisions influenced by government √
5 Sourcing decisions influenced by government √
6 R&D decisions influenced by government √
7 Quality of local infrastructure: logistics √
8 Quality of local infrastructure: channels √
9 Quality of local infrastructure: advertising √
10 Quality of local infrastructure: personnel √
11 Quality of local infrastructure: suppliers √
12 Competitors are mostly global √
13 Competitors sell globally standardized products √
14 The nature of competition is global √
15 Co-ordination of production is global √
16 Co-ordination of procurement is global √
17 Rate of product innovation √
18 Rate of process innovation √
19 Technological complexity √
20 Rate of technological change √
21 Sharing of production resources √
22 Sharing of R&D resources √
23 Sharing of management services √

Source: Adapted from Venaik et al. (2004).

Consideration 5: indicator relationships with construct antecedents and consequences.

Five formatively measured pressures are used to predict the independent reflectively measured

construct of subsidiary Autonomy (a one-dimensional construct with composite reliability of 0.90 and

average variance extracted of 61%). This additional construct of Autonomy is the criterion construct

which identifies the formative model (Diamantopoulos and Winklhofer, 2001). Autonomy is of
 16

theoretical relevance as it is considered in the literature to be one of the most important consequences

of global pressures on firms. Control variables are included to provide greater confidence that any

observed effects are not spurious results of industry and firm heterogeneity. The technique of partial

least squares (PLS) is used for this analysis (Chin, 1998) and Figure 2 shows the results obtained.

These results add further support to the formative model as the five pressures predict Autonomy well

and the majority of outer item coefficients and inner path coefficients have the right signs and adequate

t-statistics. The exception is government influence, which, although the formative model seems

appropriate from the individual indicator perspective, does not predict Autonomy.

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 17

Figure 2: Test of Criterion Validity for IR Pressures Measured Formatively

Industry and Firm Controls

Criterion:
0.09 (1.3) Autonomy -0.13 (1.9)
(26%)
Pressure 1: Pressure 5:
Government -0.24 (3.7) 0.21 (2.9) Resource
Influence Sharing
-0.36 (4.3)
Pressure 2: Pressure 4:
Quality of Local Technological
Infrastructure Pressure 3: Change i21 -0.98 (2.3)
Global
i22 1.46 (3.5)
i1 0.18 (0.7) Competition i23 -0.12 (0.4)
i2 -0.48 (1.2)
i3 0.93 (2.1)
i4 -0.06 (0.2)
i5 -0.93 (2.9) i7 -0.66 (2.0) i17 1.03 (3.3)
i6 0.73 (2.1) i8 0.53 (1.5) i12 -0.42 (1.7) i18 -0.60 (2.1)
i9 0.50 (2.0) i13 0.18 (1.1) i19 0.92 (2.5)
i10 -1.12 (3.6) i14 0.70 (2.7) i20 -0.72 (1.7)
i11 1.08 (3.7) i15 0.24 (1.1)
i16 0.46 (1.7)

Note: Boxes contain outer indicator coefficients; inner path coefficients are next to arrows (with the absolute values of the
bootstrap t-statistic in parentheses). All significant values are shown in bold type (p<0.05). The percentage under the
independent, reflective construct of Autonomy is the R2. The indicator numbers i1, i2, etc. refer to the measures listed
in Table 2.
Source: Adapted from Venaik et al. (2004).

However, it is difficult to judge a structural equation model in isolation and the five pressures

are measured reflectively measured, by rerunning the PLS analysis with indicator directionality

reversed. This additional analysis provides a clear comparison between reflective and formative

measurement models (Diamantopoulos and Siguaw, 2006).

 18

Although noting that reflective models always explain less variance than formative models

(which are optimized for prediction), the reflective measurement model performs much worse than the

formative one. The reflectively measured pressures explain 17 percent of the variance in Autonomy

compared with 23 percent for the formative model. (The total variance explained, including firm and

industry controls, is 22% and 26%, respectively). Examination of the item coefficients shows that this

difference in performance is not due to poor measurement—for the reflective model, all the item

loadings and t-values are high, and for the formative model all pressures have an adequate number of

significant weights. Instead, the difference is attributable to the reflectively measured pressures not

explaining the independent construct as well as the formatively measured ones do. Indeed, only one of

the five reflectively measured pressures has a significant and meaningful path coefficient with

Autonomy (where meaningful is β > 0.20, Meehl, 1990), namely global competition (β = –0.45, p <

0.01), whereas three of the formatively measured pressures have a significant and meaningful path

coefficient (quality of local infrastructure, global competition and technological change, β = –0.24, –

0.36 and 0.21, respectively; all with p < 0.01). For the international business literature, this is an

important finding. Most scholars expect IR pressures to impact on the degree of subsidiary autonomy

(e.g., Dunning, 1988) and thus, above and beyond its demonstrated empirical superiority, would

consider the formative model more theoretically valid.

The other model comparison that is relevant is with the measurement model commonly

accepted in the literature: for example, a two-dimensional model where the pressures of Global

Integration (dimensions 3 through 5 in Figure 2) and Local Responsiveness (dimensions 1 and 2) are

measured reflectively. For these data, this model is neither theoretically nor empirically compelling.

Although the R-square is adequate at 17 percent (excluding 4% of variance explained by controls), only

the path from Global Integration to Autonomy is significant (β = –0.42, p < 0.02). The path from Local

Responsiveness to Autonomy is not significant (β = –0.14, p > 0.15). The latter should be of concern
 19

to IR theorists. Furthermore, as might be expected when several dimensions are collapsed into two, the

reflective measurement diagnostics are not strong, especially average variance extracted (which is less

than 30% in both cases). If the measures are pruned in the traditional manner, these diagnostics can be

improved, but only at the expense of prediction and meaning. Global Integration becomes defined

solely as global competition and all the other pressures disappear from the model. For IR pressures,

these results support the theoretical arguments that formative measurement may be more appropriate.

Consideration 6: measurement error and collinearity. We also apply the vanishing tetrad

test to each construct. This test rejects the reflective model for four of the five constructs, lending

added support to the formative view taken here. However, with the fifth construct, the pressure of

resource sharing, the test does not reject the reflective model (see Table 3). As noted above, this can be

because this construct is truly better measured reflectively or because indicators in the formative

construct are uncorrelated. Here the correlations between the sharing of production, R&D and

management service resources are modest but not zero. Re-running the PLS analysis switching

resource sharing from a formative to a reflective measurement model results in a non-significant impact

of this construct on Autonomy. Although it is not possible to reach a definitive conclusion with these

data, it does suggest that resource sharing might also be better conceptualized formatively, as theory

indicates.

Collinearity is not an issue in these results as the largest condition indices from regressions of

the five sets of indicators range from 7.1 to 13.8, all of which are less than 15 (the accepted heuristic

for the point at which some concerns of collinearity start to emerge) and well below 30 (the accepted

heuristic for clear collinearity problems).

 20

Table 3: IR Pressures: Tetrad Test Results for Formative Indicators

Number
of
Constructs indicators χ2(Df) Df Significance Implication
Government influence 6 22.4 9 < 0.01 Formative
Quality of local 5 19.9 5 < 0.01 Formative
infrastructure
Global competition 5 20.5 5 < 0.01 Formative
Technological Change 4 9.8 2 < 0.01 Formative
Resource sharing 3* 1.0 2 0.59 Reflective
*As this construct had three indicators, a fourth—unrelated—indicator was added to the test. This follows the advice of
Bollen and Ting (2000).

To sum up, much of the extant research uncritically assumes a reflective measurement model

when empirically representing the integration-responsiveness pressures confronting multinational

firms. However, both theoretical and empirical analysis shows that this assumption is debatable. The

first three theoretical considerations clearly indicate that no prima facie rationale exists for the large set

of measures that represent the broad, diverse and complex domain of integration-responsiveness

pressures to share a common theme or be related to one another. The second three empirical

considerations and statistical analyses, together with tetrad tests, lend further support to the formative

measurement model. Next, we apply the same six considerations to another important construct,

market orientation.

4. Application two: measuring market orientation

The concept of market orientation has long been a cornerstone in marketing strategy. The

literature in marketing stipulates that organizations should allocate resources to the systematic

gathering and analysis of customer and competitor information and to make use of customer knowledge

to guide a customer linking strategy (Hunt and Morgan, 1995; p. 11). The emphasis placed on market

orientation as a driver of competitive advantage and business performance in marketing is not

surprising. The main tenets of this view—that is, customer-oriented thinking, customer analysis and
 21

understanding—are fundamental to the beliefs of the discipline. However, despite the concept’s

apparent credibility, the literature suffers from inconsistent measures (Mason and Harris, 2005).

The empirical evidence also indicates that the power of market orientation to predict advantage

or performance is still an open question (Langerak, 2003). For example, Agarwal and Erramilli (2003)

report no direct relationship, while Grewal and Tansuhaj (2001) show mixed results. These

inconsistencies imply that either the theory underpinning market orientation does not hold or that the

measurement model used to operationalize the construct is incorrect. This paper aims to demonstrate

that the latter is arguably one cause of these inconsistent results.

4.1. Theoretical considerations

Consideration 1: nature of the construct. The conceptualization of market orientation builds

from either cultural or behavioral criteria. According to the cultural perspective, market orientation

creates a deeply rooted customer value system among all employees and is a potential source of

competitive advantage (Hunt and Morgan, 1995). Others suggest that market orientation is a

behavioral concept that is largely a matter of choice and resource allocation (Ruekert, 1992).

Therefore, from an ontological standpoint, researchers can measure market orientation reflectively

(cultural perspective) or formatively (behavioral perspective). The market orientation literature

uncritically assumes the reflective view.

Although both cultural and behavioral definitions of market orientation are used in the

literature, the measures of market orientation are largely couched in terms of behaviors. For example,

Narver and Slater (1990, pp. 20–21) define market orientation as “the business culture that most

effectively and efficiently creates superior value for customers.” Yet, they measure market orientation

through behavioral items relating to customer orientation, competitor orientation and inter-functional

coordination (Langerak, 2003). Arguably, adding or removing any of these components would change

the conceptual interpretation of the construct, again implying a formative model is more appropriate.
 22

Consideration 2: direction of causality. Virtually all the published literature in marketing,

measures market orientation through three highly cited scales that have subsequently been synthesized

into the MORTN summary scale (Deshpande and Farley, 1998). Close examination of the items

contained in these scales reveals that the items are based on activities or behaviors that make up the

construct. Hence, conceptual justification would imply that the direction of causality is from the

indicator to the construct and not the other way around.

Consideration 3: characteristics of indicators. Lastly, all ten indicators in the MORTN scale

are concerned with a customer’s expressed needs, implying that the construct is one-dimensional and

conceived as a reaction to these needs. Yet, no attention is given to intelligence-related items that

support a proactive market orientation. The lack of emphasis currently given to proactive market

orientation is problematic, given the growing evidence that industry and customer foresight are

probably the most important components of market orientation (Hamel and Prahalad, 1994). Indeed,

Narver et al. (2004) argue that much of the criticism surrounding market orientation is due to confusion

surrounding the meaning of the term and, consequently, the way market orientation is measured. The

solution, they argue, is to divide market orientation into reactive and proactive components. Others

express related concerns about the way market orientation is measured and recommend examination of

the construct’s dimensionality (Siguaw and Diamantopoulos, 1995) or encourage modifications to the

published scales (Rossiter, 2002).

Hence, based on the three theoretical considerations in the proposed framework—the nature of

the construct, the direction of causality and the characteristics of the items used to represent the

construct—it appears that market orientation is best conceptualized and measured using a formative

model. To support this conclusion, we conduct a number of empirical tests.

 23

4.2. Empirical considerations

To address the issue of whether market orientation is more validly measured through formative

or reflective models, we analyze responses from a survey of senior executives. This sample is different

to the first application and comprises 90 respondents. The questionnaire includes eight indicators of

market orientation drawn from a literature review of reactive and proactive market-oriented scales.

Consideration 4: indicator intercorrelation. We perform a range of preliminary analyses, as

for the first application. These analyses identify two separate dimensions for reactive and proactive

market orientation, supporting Narver et al. (2004). These dimensions are largely independent of each

other, as demonstrated by low intercorrelations in oblique rotations. The association between the

indicators and these two dimensions is shown in Table 4. Given two constructs, the directionality and

strength of these indicators largely fit expectations. However, the relationship of one indicator from

the literature—“working with lead users”—is unclear; it relates fairly equally with both dimensions in

all analyses. Diagnostics for the common factor model, although better than for the first application,

are again not high enough to provide support for the reflective model. Overall, these analyses support

the theoretical considerations by suggesting two constructs measured formatively rather than one

measured reflectively.

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 24

Table 4: Market Orientation. Dimensionality and Association between Constructs and Indicators
Suggested by Preliminary Analyses

Constructs

Orientation

Orientation
Proactive
Reactive
No. Indicators
1 Responsiveness to individual customer needs relative to competitors √
2 Ease to do business with relative to competitors √
3 Share customer experience across business relative to competitors √
4 Business driven by customer satisfaction relative to competitors √
5 Predicting new market developments relative to competitors √
6 Discovery of latent needs relative to competitors √
7 Brainstorm customer usage relative to competitors √

8 Work closely with lead users relative to competitors unclear

Consideration 5: indicator relationships with construct antecedents and consequences. We use a

PLS model to assess criterion validity against two theoretically relevant and independent single-item

constructs (see Figure 3). First, a high reactive market orientation should correlate significantly with

the level of repeat business with valuable customers. We measure this independent construct through a

single item on a 5-point Likert scale: “Compared to the highest performing business in your industry,

the level of repeat business with valuable customers is far better to much worse.” This question is

worded to ensure that respondents perceive it as a concrete, singular object. Hence, a single-item

measure is entirely appropriate (Bergvist and Rossiter, 2007; Rossiter, 2002). The data are reverse

scored for the analysis, where 5 = “far better”. Second, a high proactive market orientation should

correlate significantly with success at generating revenue from new products. The study measures this

revenue generating success with a similar question: “Compared to the highest performing business in

your industry, the level of success generating revenue from new products is far better to much worse.”
 25

In contrast, no significant correlation should be found between the reactive construct and the proactive

criterion or between the proactive construct and the reactive criterion. This pattern of expected

correlations between constructs and criterion questions provides a stronger test of the measurement

model.

The results when the control variables are added—based on a formative measurement model—

are shown in Figure 3. Only one control is significant, that for firm size. Firm size has a negative

coefficient and explains 3 percent of the variance on the reactive criterion and 2 percent on the

proactive criterion. Excluding this control, the market orientations themselves explain 16 percent of

the reactive criterion and 22 percent of the proactive criterion.

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 26

Figure 3: Test of Criterion Validity for Market Orientation Measured Formatively

Firm and Respondent Controls

Reactive Proactive
Criterion Criterion
Level of Repeat Success at
Business with Generating
Valuable Revenues from
Customers New Products
(19%) (24%)

0.30 (3.2) 0.35 (2.9)

0.14 (1.2) 0.06 (0.4)

Reactive Proactive
Market Market
Orientation Orientation

i1 0.45 (1.8) I4 -0.10 (0.4)

i2 -0.56 (2.3) I5 0.42 (1.6)
i3 0.76 (4.5) I6 0.20 (0.9)
i8 0.22 (0.9) I7 0.67 (2.5)

Note 1: Boxes contain outer indicator coefficients; inner path coefficients are next to arrows (with the absolute
values of the bootstrap t-statistic in parentheses). All significant values are shown in bold type (p<0.05). The
percentage under each of the independent criteria is the R2. Indicator numbers, i1, i2, etc. refer to the measures
shown in Table 4.
 27

The results are as theoretically expected. The path from the reactive construct to the reactive

criterion is both significant and meaningful (β = 0.30; p < 0.01), as is the path from the proactive

construct to the proactive criterion (β = 0.35; p < 0.01). Also as expected, the crossover paths from

each construct to the criterion for the other are not significant. However, three of the eight

measurement indicators taken from the literature have insignificant weights. Thus a small number of

indicators essentially drive the performance on the two criteria.

If the analysis is rerun assuming a reflective measurement model, the loadings on all eight

indicators have significant t-statistics. Measurement error is not a problem here but the prediction of

the reactive criterion is worse, with an R-square of 10 percent (excluding the variance explained by the

single control) and a weaker path (β = 0.24 p < 0.02). However, the difference between the magnitude

of this path coefficient in the reflective and formative models is not statistically significant. For the

proactive criterion, the reflective and formative models have a similar performance, with the reflective

model having an R-square of 19 percent and a similar path magnitude to that of the formative model (β

= 0.33 p < 0.01).

The other comparison of relevance is with the one-dimensional, reflective model common in the

literature. This results in a reflective measure with reasonable diagnostics (composite reliability of 0.86

and average variance extracted of 43%) that explains 9 percent of the reactive criterion and 17 percent

of the proactive criterion (excluding controls). Both path magnitudes are significant (βreactive = 0.23, p <

0.02 and βproactive = 0.41, p < 0.01). Again, a fall in the predictive power of the reactive criterion is

evident when compared with the formative model, but at this sample size, the difference is not

significant.

Overall, the empirical results here are inconclusive and point toward the need for additional

tests to support or reject a formative model structure. Unlike the first example of integration-
 28

responsiveness pressures, both the formative and reflective models of market orientation are reasonably

aligned with theoretical predictions on these specific tests.

Consideration 6: measurement error and collinearity. As in the first application, we

undertake further assessment of the error structures using the vanishing tetrad test. The test results (see

Table 5) reject the reflective model for both dimensions of market orientation (reactive at the 2% and

proactive at the 10% level). Further investigation using bootstrapping shows that the 10 percent level

for proactive market orientation is more likely a result of sample size limitations on the chi square test

than the incorrect rejection of a reflective model. These results therefore imply that a formative model

may be a better way of measuring both reactive and proactive market orientation. Again, collinearity is

not an issue in these results as the largest condition indices from regressions of the two sets of

indicators are 14.6 and 13.1, respectively.

Table 5: Market Orientation: Tetrad Test Results for Causal Indicators

Number of
Constructs Items χ2(Df) Df Significance Implication
Reactive Orientation 4 8.1 2 < 0.02 Formative
Proactive Orientation 4 4.7 2 < 0.10 Formative

The weight of evidence (both theoretical and empirical) largely supports the finding that market

orientation is best represented by a two-dimensional construct measured formatively. The only

qualification to this support is for consideration 5 where the formative and reflective measurement

models both fit theoretical predictions for the criteria chosen here. The support for a two-dimensional

construct measured formatively has important intellectual implications because virtually all the work

conducted in marketing has viewed market orientation as a one-dimensional, reflectively measured

construct. Both the theoretical and empirical work presented here indicate that current scales based on
 29

one-dimensional reflective measures may not be completely valid, and also lend further support to

those arguing for two separate constructs.

5. Discussion and Conclusions

Most researchers in the management sciences assume that the correct measurement model is a

reflective one, whereas there are many instances in which this assumption may not be theoretically or

empirically justified. This paper synthesizes previous work and presents an organizing framework for

designing and testing measurement models based on both theoretical and empirical considerations

derived from extant literature. The authors agree with Borsboom et al. (2004) and Rossiter (2002) that

measurement models must be designed on theoretical considerations. However, we are also in

agreement with the work of Bollen and Ting (2000), Diamantopoulos and Winklhofer (2001) and

others who emphasize that empirical examination is required. As shown in the paper, once the data are

collected, it is often useful to know if the assumptions underlying the measurement model hold

empirically or not. Of course, it is possible that the reasons for empirical disconfirmation may be due

to incorrect instrument design or mistaken responses by the respondents. Another possibility is that the

theory underlying the measurement model is incorrect. Since empirical validation is accepted as a

norm to validate structural model hypotheses, the same should apply to test the hypotheses about

measurement models.

Next, the proposed framework is illustrated through its application to two important concepts in

management, integration-responsiveness pressures and market orientation. In both cases, the

appropriateness of a formative model over a reflective one is justified. In some cases, in personality

and attitude measurement, for example, a reflective model is obvious. In other cases, a formative

model is understandable, for example, in a human development index or an index of economic freedom

for countries. However, it is not uncommon to encounter situations in social sciences where individual

interpretation can lead to ambiguous results, especially when the construct definition and/or
 30

nomenclature are inconsistent. For example, the construct of marketing mix adaptation is measured

formatively when viewed by the researcher as a composite comprising adaptation of the various

elements of the marketing mix. However, the construct of propensity to adapt the marketing mix is

measured reflectively as it drives the degree to which the various elements of the marketing mix are

adapted by a firm. Depending on the interpretation given to “mix adaptation” by the researcher, either

measurement model is appropriate. In the case of the two applications in this paper, both theoretical

and empirical considerations suggest that formative models are more plausible than reflective ones.

This claim is not definitive, but simply offers an alternative lens for viewing and operationalizing these

two important constructs.

A potential limitation of this study is that the indicators chosen from the literature for our

questionnaire items are based on the reflective tradition. However, a counter-argument is that such

items represent a conservative test of the proposition that formative measurement is worth considering.

Indicators developed especially for formative measurement ought to perform better than those used

here. This suggests one area where further research is needed: namely, better procedures for the design

of formative indicators. Another area for research is the development of statistical techniques for

assessing the appropriateness of formative versus reflective models. The tetrad test aside, the academic

world is split between covariance and partial least squares model testing, each of which has strengths

but few complementarities that help researchers to apply the empirical tests suggested here.

The main contribution of this paper is to show the need for researchers to explicitly justify their

choice of reflective or formative measurement models by providing the supporting theoretical

arguments and empirical corroboration. Uncritical and universal application of a reflective structure to

oversimplify the measurement of broad, diverse and complex real-world constructs such as integration-

responsiveness pressures and market orientation exposes scholars to the risk of reducing the rigor of

business theory and research and its relevance for managerial decision making.
 31

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